Economic Fluctuations and Growth Research Meeting
July 13, 2013
Saki Bigio, Columbia University, and Jennifer La'O, University of Chicago and NBER
Bigio and La'O show that the input-output structure of an economy has significant qualitative and quantitative implications for the impact of financial frictions on aggregate economic activity. They first study a simple example of two different production networks: a horizontal and a vertical economy. The authors construct these economies so that in the absence of frictions, they are allocationally equivalent. However, when firms face collateral constraints, the two economies exhibit very different equilibrium properties. In particular, the vertical economy features a higher sensitivity of aggregate output, the aggregate labor wedge, and total factor productivity to tightened collateral constraints, relative to the horizontal economy. Bigio and La'O call the ratio of the drop in output in a network economy versus a representative agent economy the "network liquidity multiplier". They also show that in order to obtain any implementable allocation, the vertical economy requires more aggregate liquidity than the horizontal economy. Next, the authors solve a more general model for arbitrary input-output structures, and show that the centrality of sectors matters for how their collateral constraints affect aggregate output. They calibrate this model in order to match the input-output matrix of the U.S. economy, and use this to explore the extent to which these interrelationships among sectors can explain the drop in output during the latest recession. They find a network liquidity multiplier of around 3.8 for the U.S. economy. In order to generate the observed drop in output at the trough of the recession, their calibrated model would require a reduction in liquidity of less than one-sixth the drop in liquidity required in a representative firm model.
David Lagakos, University of California, San Diego and NBER; Benjamin Moll, Princeton University and NBER; Tommaso Porzio, Yale University; and Nancy Qian, Yale University and NBER
Using recently available large-sample micro data from 36 countries, Lagakos, Moll, Porzio, and Qian find that experience-earnings profiles are flatter in poor countries than in rich countries. Motivated by this fact, the authors conduct a development accounting exercise that allows the returns to experience to vary across countries, but which is otherwise standard. When the country-specific returns to experience are interpreted in such a development accounting framework - and are therefore accounted for as part of human capital - the authors find that human and physical capital differences can account for almost two-thirds of the variation in cross-country income differences, as compared to less than half in previous studies.
Mark Aguiar, Princeton University and NBER; Manuel Amador, Stanford University and NBER; and Emmanuel Farhi and Gita Gopinath, Harvard University and NBER
Aguiar, Amador, Farhi, and Gopinath propose a continuous time model of nominal debt and investigate the role of inflation credibility in the potential for self-fulfilling debt crises. Inflation is costly, but it reduces the real value of outstanding debt without the full punishment of default. With high inflation credibility, which can be interpreted as joining a monetary union or issuing foreign currency debt, debt is effectively real. By contrast, with low inflation credibility, sovereign debt is nominal and in a debt crisis a government may opt to inflate away a fraction of the debt burden rather than default explicitly. This flexibility potentially reduces the country's exposure to self-fulfilling crises. On the other hand, in the absence of a crisis, the government lacks credibility to resist inflating. This latter channel raises the cost of debt in tranquil periods, and makes default more attractive in the event of a crisis, thus increasing the country's vulnerability. The authors characterize the interaction of these two forces, and show that there is an intermediate inflation credibility that minimizes the country's exposure to rollover risk. Low inflation credibility causes both high inflation in tranquil periods, and increased vulnerability in a crisis.
Robert Hall, Stanford University and NBER
In recessions, the stock market falls more than in proportion to corporate profit. The discount rate implicit in the stock market rises. All types of investment fall, including employers' investment in job creation. According to the leading view of unemployment - the Diamond-Mortensen-Pissarides model - when the incentive for job creation rises, the labor market tightens and unemployment falls. Employers recover their investments in job creation by collecting a share of the surplus from the employment relationship. The value of that flow falls when the discount rate rises. Thus, high discount rates imply high unemployment. In this paper, Hall does not explain why the discount rate rises so much in recessions. Rather, he shows that the rise in unemployment makes perfect economic sense in an economy where the stock market falls substantially in recessions, because the discount rises.
Daron Acemoglu, Massachusetts Institute of Technology and NBER; Ufuk Akcigit, University of Pennsylvania and NBER; Nicholas Bloom, Stanford University and NBER; and William Kerr, Harvard University and NBER
Acemoglu, Akcigit, Bloom, and Kerr build a model of firm-level innovation, productivity growth, and reallocation featuring endogenous entry and exit. A key feature is the selection between high- and low-type firms, which differ in terms of their innovative capacity. The authors estimate the parameters of the model using detailed U.S. Census micro data on firm-level output, research and development (R&D), and patenting. The model provides a good fit to the dynamics of firm entry and exit, output and R&D, and its implied elasticities are in the ballpark of a range of micro estimates. The authors find that industrial policy subsidizing either the R&D or the continued operation of incumbents reduces growth and welfare. For example, a subsidy to incumbent R&D equivalent to 5% of GDP reduces welfare by about 1.5% because it deters entry of new high-type firms. However, welfare increases of about 5% are possible if the continued operation of incumbents is taxed while at the same time R&D by incumbents and new entrants is subsidized. This is because of a strong selection effect: R&D resources (skilled labor) are inefficiently used by low-type incumbent firms. Subsidies to incumbents encourage the survival and expansion of these firms at the expense of potential high-type entrants.
Shigeru Fujita, Federal Reserve Bank of Philadelphia, and Giuseppe Moscarini, Yale University and NBER
Using data from the Survey of Income and Program Participation (SIPP) covering 1990−2011, Fujita and Moscarini find that recalls of former employees are surprisingly common and are associated with dramatically different unemployment and post-unemployment outcomes, compared to those who change employer after a jobless spell. More than 40% of all workers who become unemployed return to their previous employer after a jobless spell. One quarter of them are permanently separated workers who, unlike those laid off temporarily, did not expect to be recalled. Recalls are associated with much shorter unemployment duration and smaller wage changes after the jobless spell. Negative duration dependence of unemployment disappears once recalls are excluded: those who change their employer after a jobless spell leave unemployment at lower but roughly constant hazard. We also show that the probability of finding a new job is much more procyclical than the probability of being recalled. Taking this fact into account significantly alters the estimated elasticity of the matching function with respect to job market tightness and the time-series behavior of matching efficiency. In particular, labor market mismatch in 2008-2010 is considerably larger than the conventional measure indicates. To make sense of the empirical evidence, the authors develop a search-and-matching model in which the separation decision is accompanied by a recall option. While new matches require costly searches and are mediated by a matching function, recalls are free and are triggered both by aggregate shocks and job-specific shocks that continue to evolve even after separation. The recall option is lost when the unemployed worker accepts a new job. A quantitative version of the model captures well the cross-sectional and cyclical facts through selection of recalled matches.